Itaú BBA - MEXICO – Higher inflation in August

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MEXICO – Higher inflation in August

September 9, 2020

Core goods inflation accelerated further

CPI in August was broadly in line with market expectations. Consumer prices increased 0.39% month-over-month in August (from -0.01% a year ago), close to our forecast of 0.40% and in line with market expectations (as per Bloomberg). In turn, core inflation stood at 0.32%, above our forecast of 0.26% and market expectations of 0.28%. We note that core inflation continues to be pressured by prices for core goods, which gained 0.47% (from 0.30% a year ago and 5-year median of 0.39%).   

Supply/demand shocks due to the outbreak keeps pressuring inflation up. Annual headline and core inflation accelerated in August to 4.05% (from 3.62% in July) and 3.97% (from 3.85%), respectively. Within core inflation, prices for goods continue to increase at a strong pace (5.36% year-over-year in August, from 5.19% in July), with core food and non-food inflation at 7.04% and 3.58%, respectively. On the benign side, services inflation is still below Banxico’s target of 3% (2.46% year-over-year in August), reflecting downward pressure from the widening of the negative output gap. Finally, non-core energy prices continued recovering (0.27% in August, from -0.41% in July).

At the margin, headline and core inflation continues at high levels. Using seasonally adjusted three-month annualized figures, the CPI stood at 6.72% in August (from 9.23% in July), while core CPI stood at 5.06% (from 5.11%).

We expect inflation at 3.8% for yearend 2020 reflecting the persistence in core goods inflation.
 We currently expect only one additional 25-bp rate cut in Mexico this year (at September´s meeting), but the high inflation figures increase the odds of no further cuts this year. However, looking forward, we expect Banxico to resume the easing cycle next year, reaching a policy rate of 3.50% as inflation decelerates driven by a wide negative output gap (we expect inflation at 3.2% end of year 2021).

Julio Ruiz

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